Tag: unemployment

Pay growth has been modest by historical standards across many developed economies in recent years, despite tightening labour markets, and Ireland is no exception- average weekly earnings only started to rise again in 2014, and average annual increases of around 1% have been the norm. Unemployment peaked in early 2012 at 16%, and has been falling steadily since, declining to 6.2% at the end of 2017, so one might expect that firms would have to increase pay to attract and retain labour.

Average weekly earnings did pick up through 2017, according to the latest CSO data, rising by by annual 2.5% in the final quarter of the year, which brought the annual average increase to 2%. The growth in private sector earnings last year was lower, at 1.8%, and was outpaced by the 2.6% average rise in the public sector. Pay in the latter is on average 41% higher than in the private sector, but has generally lagged since 2008, when the differential was 46%.

Average pay masks large differentials across the various sectors in the economy and the the recovery has been kinder to some workers than to others; the earnings of workers in Information and Communication, Scientific and Professional services and Adminstration and Support have all significantly outstripped the average growth in pay, while the Financial sector has recently recorded strong pay growth after steep falls during the recession. Surprisingly, perhaps, pay in construction is not as buoyant as one might imagine, with average earnings barely increasing in 2017 and still below the 2008 level.

Consumer prices rose by only 0.4% last year so a 2% pay rise translated into a 1.6% increase in real earnings. Nominal pay growth is generally expected to accelerate in 2018, given the further erosion of slack in the labour market, although, as seen elsewhere, the traditional relationship between unemployment and pay growth, the Phillips Curve, has become much flatter,

Irish consumer sentiment, as captured by the KBC/ESRI monthly index, reached a record high early in 2016 before slipping back later that year.It has picked up again in recent months and is now close to the previous peak. Households would therefore seem to feel good about the economy and their own financial situation and an alternative measure, the Misery Index, tells a similar story.

That is simply the sum of the unemployment rate and the inflation rate, two readily available monthly indicators that are likely to have a strong impact on the average household. The index fell to around 6 in 2004, reflecting an unemployment rate of 4.5%, and soared to a high of 18 in 2011 amid a collapse in employment.

The steady fall in unemployment in recent years has been the main driver of the decline in the index, which fell to an all-time low in June of 5.7%, with inflation at -0.4% and unemployment at 6.1%.The latter has fallen further, to 6.0%, but inflation has turned modestly positive so the index is now rising again, albeit still at 6.3%.

The Misery index has probably bottomed in this cycle, however, given the likely trend from here in inflation and unemployment. The latter may find it difficult to fall much further as the recent data implies we are at or near full employment; it has taken five months for the unemployment rate to fall from 6.2% to 6.0%.

Inflation may well see the sharpest change. Falling energy prices and lower mortgage rates were big factors in dampening the CPI over the past three years but energy costs have now started to rise again on an annual basis and mortgage costs are now unchanged on a year earlier. The euro’s appreciation against Sterling has proved a significant counterweight over the past year, reducing the price of imported goods, notably food, but that will not be repeated absent another lurch down in the UK exchange rate.

Consequently, we may well have already seem the low of the cycle in the Misery index, although the increase may well be at a modest pace.

The latest data on the Irish labour market, from the Quarterly National Household Survey (QNHS) in q2, shows that employment is stronger than generally thought, but that the labour force is also growing rapidly again, boosted by a return to net immigration, with the result that the numbers unemployed actually rose marginally, keeping the unemployment rate unchanged over the first half of the year.

Employment has been growing steadily now for some time and the second quarter saw an acceleration, with the numbers at work rising by a seasonally adjusted 20,000, following a 16,000 rise in q1. That increase brought the annual rise to 56,000, or 2.9%, and the seasonally adjusted employment figure above two million for the first time since early 2009. Over the past year most industries have created jobs, notably construction ( 11,000) and manufacturing (9,000), although there was some modest job losses in financial services and (surprisingly) professional and scientific services.

The labour force in Ireland contracted sharply during the recession and has been slow to recover, although that now appears to be changing, with a 22,000 rise in q2, bringing the annual increase to some 33,000. The participation rate has picked up but a big factor in Ireland’s case is migration. We now know from the 2016 census that net emigration since 2011 was much lower than thought, and the CSO’s latest estimates show a return to net immigration in the year to April 2016. Emigration is still high , at 76,000, but immigation has picked up, to 79,000, giving a net 3k inflow. Most immigrants are still from outside the EU (32,000) but the past year has seen a rise in returning Irish migrants, with a 10,000 increase to 21,000.

The CSO publishes a monthly unemployment figure which is often revised following the QNHS release, and that is indeed the case on this occasion. The unemployment rate has been revised down in q2, to 8.4% from 8.7%, but that is now unchanged from the first quarter, with the numbers unemployed now revised up. Indeed, the unemployment figure in the second quarter, at 183,000, is actually 1500 higher than in q1.

Overall, the figures indicate that the economy is in better shape than indicated by the first quarter GDP figure ( which showed a contraction) and that household incomes are being supported by strong employment growth. Yet they also highlight an issue we have consistently flagged of late- the growing signs of significant capacity constraints. Migration has turned positive again, population growth has picked up and the labour market has tightened, putting pressure on existing resources in housing, health , education and the infrastructure. There is a clear case then for additional government spending in these areas, particularly when the cost of borrowing is so low, yet existing fiscal rules mean that the State’s room for manoevre is limited.

Residential mortgage arrears in Ireland are extremely high, both in absolute terms and relative to comparable housing markets. At the peak of the cycle , 130k mortgages were over 90 days in arrears , equivalent to 1 in 7 of outstanding mortgages owed to domestic lenders. In the UK the figure peaked at a little over 1 in 100 and in the first quarter of 2015 the total amounted to just 114k, in a market with 11.1 million mortgages. The good news is that the Irish figure is now falling steadily, and our arrears model points to a further decline this year, in the absence of a significant shock to the economy.

Residential mortgages have been treated differently to other assets by the Irish banks. Real estate and commercial property loans were sold to Nama in 2010 for 43 cents in the euro, so crystallising a €42bn loss for the banks and opening up a capital hole subsequently largely filled by the Irish taxpayer. Residential mortgages were not marked to market, in contrast, and arrears built up rapidly, reflecting , inter alia, societal pressure against large scale repossessions, the absence of foreclosure on any scale in modern Ireland, some legal issues, political unease and a reluctance by the banks themselves in an environment of falling property prices and capital constraints.

Arrears on Private Dwelling Homes (PDH) are largely driven by three factors. The most important is unemployment, as the loss of a job and subsequent hit to income is one of the main reasons why mortgage payments cannot be met. The numbers unemployed in Ireland soared during the recession, from under 100k to a peak of 325k in late 2012, with the result that arrears climbed rapidly. Interest rates matter too, although the impact is not as significant, and the decline in mortgage rates since 2008 has had some offsetting impact on arrears. A third factor is house prices, perhaps surprisingly, but the relationship is clear in the data; the fall in residential values from 2007 to 2013 was a factor in pushing up arrears , with the scale of negative equity appearing to influence the decision on whether to continue to meet the monthly mortgage payment.

All three factors , with varying lags, help determine the level of PDH arrears in our model, which has performed reasonably well in tracking the 2013 peak and subsequent decline; PDH arrears in the first quarter of 2015 had fallen to 74k (9.7% of the outstanding stock ) from a high of 99k (12.9%). House prices are now rising, so putting downward pressure on arrears , but the main driver of the fall is the improvement in the labour market and accompanying decline in the numbers out of work. As noted, these explanatory variables enter the equation with a lag so we can forecast arrears forward, given the current level of interest rates, unemployment and house prices, and that points to a figure around 50k by year-end, or well under 7% of the PDH mortgage stock. All econometric equations have a margin of error, of course, and debtor behaviour can change, particularly in response to an economic shock or a perceived change in the attitude of lenders. The last few months has also seen a marked slowdown in the pace at which unemployment is falling, which if sustained will impact arrears into 2016.

There is less data available on Buy to Let (BTL) arrears and there seems to be other factors at work, making it difficult to derive a parsimonious model. Arrears in this market are proportionately much higher than private homes, although they also appear to have peaked, albeit a year after PDH, and are also now declining ; the q1 figure was 27k ( 19.7% of the total stock) from a high of 32k (22.1%). The different drivers in BTL are also evident from the decision by lenders to send in rent receivers in order to recover mortgage payments, with the total rising to 6k in the first quarter.

The improvement in the economy and the recovery in the housing market have therefore resulted in a brighter picture on arrears, although these factors have also prompted a change of tack on repossessions ( the sale of loan books, a return to bank profitability and a new financial regulator in Frankfurt have no doubt also played a part). The flow of properties into repossession has certainly increased, rising to 557 in q1 from 354 a year earlier ( half the total is voluntary ) and that figure looks likely to rise, given the reported numbers before the courts.

Irish consumer confidence , as measured monthly by the ESRI/KBC index, has risen sharply over the past year and is now back at levels last seen in early 2007, i.e. before the financial crisis and subsequent plunge in Irish employment and economic activity. The economic situation in Ireland has certainly improved of late but the scale of the change appears at odds with the buoyant confidence readings and is difficult to explain.

The index is compiled from a telephone survey of households and is based on a number of questions involving the respondents own economic situation and perceptions of the broader economic backdrop. The series is volatile and is best viewed as a three-month moving average and on that basis over the past decade has ranged from over 100 (during 2004 and 2005) to around 40, the low recorded in mid- 2008. Confidence subsequently picked up to a high of 66 in mid-2010 before plunging back below 50 around the bail-out and entry of the Troika later that year. A slow and uneven recovery ensued but the past twelve months has seen a marked acceleration, with the index currently standing at 85 from around 60 in the spring of last year.

As noted, this is now at levels last seen some seven years ago but the economic backdrop then was very different. The economy was at full employment, for example, with the unemployment rate at 4.5% against 11.7% now, although the latter has fallen from a peak of over 15%. Inflation was much higher back then, at around 5%, as against the current 0.3%, but the Misery index (the sum of the unemployment rate and the inflation rate) was still lower , at 9.6 versus 12 today. Wages were also growing strongly in 2007, by 5% per annum, in contrast to the falls recorded in recent years ,and of course disposable income has also been hit by tax increases since 2008.

The index is thought to have a close relationship with retail sales and consumer spending but again the picture is very different in the two periods; real personal consumption was growing at an annual rate of some 7% in the first quarter of 2007 but the most recent figure, for the final quarter of 2013, showed a 1.1% fall in consumption. Spending probably turned positive again in the first quarter but most forecasters envisage a 2% rise in 2014 at best, far from the pace recorded when confidence was last at similar levels.

It may well be that the index is responding in an exaggerated manner to specific variables, such as the rise in house prices ( which is not positive for everyone), or simply reflecting relief that the economic situation is not as dire as was the case in 2008-2010, and that the economic outlook, although still cloudy, is at least somewhat clearer than appeared at the worst of the crisis. It is also possible that the consensus is wrong and that spending will surprise to the upside so supporting the confidence index as a useful forward indicator of spending. Time will tell on that issue but it does seem clearer that another observed relationship involving the index has indeed broken down, at least for now- the correlation between consumer confidence and support for the government. In general, strong readings in confidence tended to go hand in hand with strong support for the sitting government, as captured by opinion polls, but that relationship appears to have well and truly splintered of late , as the confidence surge over the past year has not translated into a boost for the government in the polls.